2022 (8) TMI 1385 - AT - Income Tax

Tribunal rules JDA capital gains non-taxable for 2010-11 assessment year, upholds 25% expense disallowance.

Kola Venkat Rama Naidu Versus CIT (A) -6 Bangalore

Kola Venkat Rama Naidu Versus CIT (A) -6 Bangalore - TMI Issues Involved:1. Legality and propriety of the reassessment order.2. Assumption of income and its basis.3. Consideration of statutory documents and litigation.4. Date of transfer and applicability of section 2(47)(v) of the Income Tax Act.5. Computation of capital gains and developmental expenses.6. Taxability of capital gains under the Joint Development Agreement (JDA).Issue-wise Detailed Analysis:1. Legality and Propriety of the Reassessment Order:The appellant contended that the reassessment order dated 16.11.2019 was illegal, improper, and unjust, violating the principles of natural justice. The Assistant Commissioner of Income Tax (ACIT) had reopened the assessment based on the JDA dated 07.05.2009, assuming income had escaped assessment. The Tribunal found that the reopening of the assessment was based on erroneous assumptions and lacked a legally sustainable basis, as the permissive possession given under the JDA did not constitute a transfer under section 2(47)(v) of the Income Tax Act.2. Assumption of Income and Its Basis:The appellant argued that the ACIT erred in assuming income during the impugned period, as no income had accrued due to inaction on the project. The ACIT had computed the income based on an imaginary selling price without any basis. The Tribunal observed that the transferee had neither performed nor was willing to perform its obligations under the JDA in the assessment year 2010-11, and no development activity had taken place. Therefore, the assumption of income was unjustified.3. Consideration of Statutory Documents and Litigation:The appellant claimed that the ACIT overlooked statutory documents like the granting of Khata, the original JDA, and ongoing litigation over the properties, which disabled the appellant and the transferee from carrying out any activity. The Tribunal noted that the Khata of the property was transferred to the appellant only on 28.05.2013, and various permissions for construction were obtained in subsequent years. The ongoing litigation and lack of necessary approvals hindered the project's progress, supporting the appellant's claim.4. Date of Transfer and Applicability of Section 2(47)(v) of the Income Tax Act:The ACIT treated the date of entering into the JDA (07.05.2009) as the date of transfer, applying section 2(47)(v) to compute capital gains. The Tribunal referred to the Bombay High Court's judgment in Chaturbhujdas Dwarkadas Kapadia vs. CIT, emphasizing that the conditions under section 53A of the Transfer of Property Act must be satisfied for section 2(47)(v) to apply. The Tribunal found that the transferee had not performed or shown willingness to perform its obligations under the JDA in the assessment year 2010-11, and thus, section 2(47)(v) was not applicable.5. Computation of Capital Gains and Developmental Expenses:The ACIT computed short-term capital gains and added 25% of the development expenses as additional income. The Tribunal directed the AO to compute the capital gains as long-term capital gains, granting the benefit of indexation of the cost of acquisition. The Tribunal also sustained the addition on account of disallowance of 25% of development expenses, as the appellant had not produced complete documentary proof for the development expenses incurred.6. Taxability of Capital Gains under the Joint Development Agreement (JDA):The Tribunal analyzed the JDA's terms and found that the permissive possession given to the developer did not constitute a transfer under section 2(47)(v). The Tribunal noted that the transferee had not performed its obligations, and no development activity had taken place in the assessment year 2010-11. The Tribunal concluded that the capital gains could not be taxed in the assessment year 2010-11 and should be taxed in the year when the appellant actually received its share of constructed flats from the developer.Conclusion:The Tribunal partly allowed the appeal, holding that the capital gains arising from the JDA dated 07.05.2009 could not be taxed in the assessment year 2010-11. The Tribunal directed the AO to compute the capital gains as long-term capital gains and sustained the addition on account of disallowance of 25% of development expenses. The Tribunal dismissed ground No. 12 as not pressed and did not adjudicate ground Nos. 2 and 13 as they were not argued before it.